Monetary policy is all that’s left for growth

So the Federal budget has been and gone – from an AUD- and equity-market perspective it’s a ‘move along, nothing to see here’ budget.

Source: Bloomberg

The three things I needed to see for the ASX to break above 6000 points have been and gone. Only one was delivered – an RBA rate cut. The other two failed miserably. The banks failed to deliver stellar numbers and, as expected, the budget was lacking a growth profile. The 6000 point level appears a long way off now.

However, breaking down the budget, there were winners and losers.

The big winners from last night’s budget are:


  1. Small businesses

    A 150 basis-point cut to 28.5% to the tax rate, or a 5% tax discount for those that are unincorporated, was the first part of the changes to small business.

    The second change for small business that may see a flow through to equities was that the asset write-off level increased to $20,000. You could argue the beneficiaries of this tax break will be electronics providers (JBH, HVN), office equipment providers (WES – Officeworks) and hardware providers (WES - Bunnings, MTS - Mitre 10, and WOW – Masters) as small businesses stock up on these items. However, that is a long bow in my eyes as it not a huge pool of funds in real terms.


  1. The second major winner from the budget was families

    With the extra $3.5 billion in childcare this is a big ticket item. However, from an equity-only perspective there is almost no effect here. G8 Education is likely to reap the benefit, along with Affinity Education group, but the total effect on the ASX is next to nothing. Having said that, the increase to childcare may increase general work levels across the economy and therefore provide improvements in growth and inflation, which is AUD positive. However, this will require a very long lead time and is therefore hard to trade.


The losers are the interesting ones:

  1. Wealthy retirees with $326,000 in assets or more

    This group will lose their part-pension benefits. There is an interesting divergence here as it’s a negative for those on part pensions but could be a positive for elsewhere.

    Will this cut force those receiving the benefit to look elsewhere to make up the lost income? The assumption would be yes. That is likely to mean increased investment in income or total returns assets as retirees look to make up the difference. That would suggest a boost to equity investment. However, the fact the market is already elevated and most wealthy retirees will have diversified earnings across all asset classes means any boost to equities will be limited as they will likely increase investment in all asset classes, not just one.


  1. Infrastructure spending

    Something that appears ‘missing in action’ from last night’s announcement. Where have the ‘nation building’ promises gone? Yes, there was sustainable allocation to infrastructure in last year’s budget yet the Senate has either watered down projects or hasn’t let them pass.

    This year only an additional $499 million is to be spent on nine projects in Western Australia. This is disappointing from a growth and equity perspective. Firms that miss out here are the likes of Lend Lease, engineering firms (LEI and UGL) and infrastructure providers (TCL).


Fiscal policy is, in all honesty, aimed at the individual and the nuclear family, and clearly the government have delivered overnight. A cynical call would be to say, ‘votes don’t come cheap’.

The issue is that neither side of politics has the will or want to make the hard calls on spending and revenue. This is evident in what has been delivered by the Liberal Party last night and the fact the Labor Party is right there with them in doling out similar policies – even suggesting they would do more on the spending side if they were to form a government.

Australia needs to stop ‘the don’t tax this group, tax that group’ mantra and realise the future of government spending has a limit and revenue will have to be found.

What else is concerning is the GDP forecasts from last night are so optimistic. The suggestion of a growth rate of 3.5% come 2015-16 is hard to believe, considering global factors. The likelihood of failure is high in my eyes.

What last night’s budget also means from a policy perspective that is fiscal policy is not going to answer the call to really support growth. That means the sledge hammer that is monetary policy will have to do the heavily lifting – Glenn Stevens is going to have to work very hard to deliver on the forecasted expectations of the government.

What’s more, the divergence between the RBA’s forecast and the government’s forecast are stark. The Statement of Monetary policy last Friday saw growth and inflation expectations being downgraded while fiscal expectations have been upgraded – who is right is yet to be seen. However, I will say this: fiscal expectations will certainly need everything to go right to reach expectations.

Ahead of Australian open

The ASX bucked futures expectations for the third time in a row yesterday. Expectations were to the downside yet the market recovered in the two sessions before the futures were expecting gains, yet the market fell. We are currently calling the market down 10 points to 5664. However, the volatility in the US and European markets suggest trade is likely to follow suit here.

The VIX index is at 2015 highs and I can’t see that slowing as the bond market rout is transferred into the equity market and Greece moves closer to default, risking being expelled from the EU. Risk is building globally – something Australia will not escape.

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